Column: You Are What You Measure

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A loose consensus has formed around the idea that basing CEO pay on, say, five years of stock returns would eliminate some of the reckless decision making that led to the Great Recession. But I suspect that even if you could build a compensation plan that focuses on long-term shareholder value, you’d solve only part of the problem.

That’s because such a scheme still ties CEOs’ motivation to one fickle number—company share price—and assumes that pay alone motivates chief executives to perform.

Any number of things can motivate CEOs—peer recognition, for example, and even a desire to change the world. In fact, CEOs usually have all the money they need. Why then does it seem that they care more about stock value and the compensation it produces than those other forms of motivation?

The answer is almost uncomfortably simple: CEOs care about stock value because that’s how we measure them. If we want to change what they care about, we should change what we measure.

It can’t be that simple, you might argue— but psychologists and economists will tell you it is. Human beings adjust behavior based on the metrics they’re held against. Anything you measure will impel a person to optimize his score on that metric. What you measure is what you’ll get. Period.

This phenomenon plays out time and again in research studies. Give someone frequent flyer miles, and he’ll fly in absurd ways to optimize his miles.

When I was at MIT, I was measured on my ability to handle my yearly teaching load, using a complex equation of teaching points. The rating, devised to track performance on a variety of dimensions, quickly became an end in itself. Even though I enjoyed teaching, I found myself spending less time with students because I could earn more points doing other things. I began to scrutinize opportunities according to how many points were at stake. In optimizing this measure, I was not striving to gain more wealth or happiness. Nor did I believe that earning the most points would result in more effective learning. It was merely the standard of measurement given to me, so I tried to do well against it (and I admit that I was rather good at it).

This phenomenon happens at an organizational level, too. States that use standardized education assessment tests produce kids who indeed perform well on these tests but falter when asked to demonstrate their knowledge of the same material in a different way. Does that make teachers bad at their jobs? No. They’re simply behaving the way people do when they’re judged on the basis of a metric.

So every morning, a CEO arrives in his office and checks the number he’s judged on: the stock price. He’ll meet with people who have ideas about how to make it higher. Now and again, he’ll buy or sell something, or hire or fire some people, to move the number. All the while, analysts will keep watch, praising him when the number goes up and criticizing when it goes down. If you were subjected to such unrelenting scrutiny, wouldn’t you do as much as you could to get the number up? Even if you knew your actions would probably come back to bite you in the long run?

To change CEOs’ behavior, we need to change the numbers we measure. Stock value metrics that focus on the long term are a start, but even more important are new numbers that direct leaders’ attention to the real drivers of sustainable success.

If we want to change what CEOs care about, we should change what we measure.

What are those numbers? Ideally, they’d vary by industry, situation, and mission, but here are a few obvious choices: How many new jobs have been created at your firm? How strong is your pipeline of new patents? How satisfied are your customers? Your employees? What’s the level of trust in your company and brand? How much carbon dioxide do you emit?

None of these metrics is as easy to measure as shareholder value. That’s part of why we’re so fixated on it. But if we measure just what’s easy, we’ll maximize just what’s easy.

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